nep-mic New Economics Papers
on Microeconomics
Issue of 2018‒04‒02
fourteen papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. A Theory of Dynamic Contracting with Financial Constraints By Rohit Lamba; Ilia Krasikov
  2. Disentangling Moral Hazard and Adverse Selection By Hector Chade
  3. Contribution To A Public Good Under Subjective Uncertainty By Anwesha Banerjee; Nicolas Gravel
  4. Why Black Swan events must occur - an ontological investigation By Thomas Santoli; Christoph Siebenbrunner
  5. Blockchain Disruption and Smart Contracts By Lin William Cong; Zhiguo He
  6. Strategy-Proofness and Efficiency of Probabilistic Mechanisms for Excludable Public Good By Kazuhiko Hashimoto; Kohei Shiozawa
  7. Targeting the Key Player: An Incentive-Based Approach By Mohamed Belhaj; Frédéric Deroïan
  8. Credit markets, Limited commitment and Optimal monetary policy By Francesca Carapella
  9. Prosecution and Conviction under Hindsight Bias in Adversary Legal Systems By Christmann, Robin
  10. Preliminary investigations for better monitoring. Learning in repeated insurance audits By Reda Aboutajdine; Pierre Picard
  11. An efficient and implementable auction for environmental rights By Peyman Khezr; Ian A. MacKenzie
  12. Public good provision financed by nonlinear income tax under reduction of envy By Shuichi Tsugawa; Takuya Obara
  13. Collusion in mixed oligopolies and the coordinated effects of privatization By João Correia-da-Silva; Joana Pinho
  14. Mixture of consistent stochastic utilities, and a priori randomness * † By Mrad Mohamed; N. El Karoui

  1. By: Rohit Lamba (Penn State University); Ilia Krasikov (Penn State University)
    Abstract: We study a dynamic principal-agent model where the agent has access to a persistent private technology but is strapped for cash. Financial constraints are generated by the periodic interaction between incentives (private information) and feasibility (being strapped for cash).This interaction produces dynamic distortions that are a sum of two effects: backloading of incentives and illiquidity. Bad technology shocks increase distortions and monotonically push the agent further away from efficiency. An endogenous number of good shocks is required for the agent to become liquid, and eventually for the contract to become efficient. Efficiency is an absorbing state that is reached almost surely. The optimal allocation can be implemented through a mechanism which is precisely pinned down by a dynamic information operator. The shares of principal and agent in the net present value of economic surplus are endogenous to the evolution of technology shocks. Surplus itself is increasing in the share of the agent, and in his type contingent utility spread. By comparing the agent’s utility with and without financial constraints, the model provides a foundation for the usefulness of limited liability in dynamic contracts
    Date: 2017
  2. By: Hector Chade (Arizona State University)
    Abstract: This paper analyzes a canonical principal-agent problem with moral hazard and adverse selection. The agent is risk averse and has private information about his disutility of taking an unobservable action. The principal is risk neutral and designs a menu of contracts consisting of a compensation scheme and a recommended action for each type of agent to maximize expected profit. We first derive a set of sufficient conditions for menus to be feasible (i.e., satisfy participation and incentive compatibility). Then we provide a method of solution, decoupling, consisting of first solving a cost minimization problem for a pure moral hazard problem for each type, action, and utility level of the agent, and then using the resulting cost function to solve a suitable adverse selection problem. This relaxed problem is both tractable and delivers a candidate solution for the original problem. We show several classes of primitives under which this candidate solution is in fact feasible and hence optimal. We also describe several properties that optimal menus exhibit when decoupling is valid.
    Date: 2017
  3. By: Anwesha Banerjee (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Nicolas Gravel (CSH - Centre de sciences humaines de New Delhi - MEAE - Ministère de l'Europe et des Affaires étrangères - CNRS - Centre National de la Recherche Scientifique, AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper examines how voluntary contributions to a public good are affected by the contributors’ heterogeneity in beliefs about the uncertain impact of their contributions. It assumes that contributors have Savagian preferences that are represented by a two-state-dependent expected utility function and different beliefs about the benefit that will result from the sum of their contributions. Under some conditions imposed on preferences, we establish general comparative static results on the effect of specific changes in the distribution of beliefs on the (Nash) equilibrium provision of public good. We specifically shows that the equilibrium public good provision is increasing with respect to first-order and second order stochastic dominance changes in the distribution of beliefs.
    Keywords: voluntary provision, public good, uncertainty, beliefs, optimism, consensus
    Date: 2018
  4. By: Thomas Santoli; Christoph Siebenbrunner
    Abstract: We develop a first-order deductive system to show that the occurrence of Black Swan events is implied by their definition. It follows as a corollary of our theorem that any computational model of decision-making under uncertainty is incomplete in the sense that not all events that occur can be taken into account. In the context of decision theory we argue that this constitutes a stronger sense of uncertainty than Knightian uncertainty.
    Date: 2018–03
  5. By: Lin William Cong; Zhiguo He
    Abstract: Blockchain technology features decentralized consensus as well as tamper-proof and algorithmic executions, and consequently enlarges the contracting space through smart contracts. Meanwhile, the process of generating decentralized consensus, which involves information distribution, necessarily alters the informational environment. We analyze how decentralization improves consensus effectiveness, and how the quintessential features of blockchain reshape industrial organization and the landscape of competition. Smart contracts can mitigate information asymmetry and deliver higher social welfare and consumer surplus through enhanced entry and competition, yet blockchains may also encourage collusion due to the irreducible distribution of information, especially in consensus generation. In general, blockchains can sustain market equilibria with a larger range of economic outcomes. We further discuss anti-trust policy implications targeted to blockchain applications, such as separating consensus record-keepers from users.
    JEL: D4 D8 G2 L13 L4 O3
    Date: 2018–03
  6. By: Kazuhiko Hashimoto; Kohei Shiozawa
    Abstract: We study strategy-proof probabilistic mechanisms in a binary excludable public good model. We construct a new class of probabilistic mechanisms satisfying strategy-proofness, called mechanisms. We first show that the mechanisms are second-best efficient. Next, we identify the optimal mechanism with respect to the supremal welfare loss, and show that it improves the inefficiency of the equal cost sharing with maximal participation mechanism [Moulin (1994)] and the anonymous augmented serial mechanisms [Ohseto (2005)].
    Date: 2018–01
  7. By: Mohamed Belhaj (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales); Frédéric Deroïan (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales)
    Abstract: We consider a network game with local complementarities. A policymaker, aiming at minimizing or maximizing aggregate effort, contracts with a single agent on the network to trade effort change against transfer. The policymaker has to find the best agent and the optimal contract to offer. Our study shows that for all utilities with linear best-responses, it only takes two statistics about the position of each agent on the network to identify the key player: the Bonacich centrality and a weighted measure of the number of closed walks originating from the agent. We also characterize key players under linear quadratic utilities for various contractual arrangements.
    Keywords: key player,network,linear interaction,incentives,contract,limited budget
    Date: 2018–02
  8. By: Francesca Carapella (Federal Reserve Board)
    Abstract: In a dynamic model with credit under limited commitment money can be essential when limited memory weakens the effects of punishment for default. There exist equilibria where both money and credit are used as media of exchange, and default occurs. In this equilibria the Friedman rule is not optimal. Inflation acts to discourage default by raising the cost of holding money, which is primarily held by defaulters. This results in relaxing the limited commitment constraint and raising welfare for all agents, including defaulting ones. The equilibrium is unique if and only if monetary policy and agents' money holdings are chosen sequentially.
    Date: 2017
  9. By: Christmann, Robin
    Abstract: The plea bargaining mechanism in criminal procedure serves as a favorable screening device, separating between the guilty and the innocent. Previous literature ignored the impact of asymmetric information on prosecutor performance inside the adversarial court, which degrades his bargaining position. This paper presents a sequential prosecution game with endogenous courts, and shows that the successful conviction in court crucially depends on prosecutor´s beliefs and incentives. If the prosecutor is sufficiently convinced of the defendant´s guilt ex-ante, he can commit to trial, and the favorable semiseparating equilibrium is obtained. Applying the first formal model of a hindsight biased prosecutor, we find that the negative impact of uncertainty on prosecutor performance is partly mitigated by hindsight bias, and the self-selection of guilty defendants can even improve. Several caveats, like excessive charges, the nature of the case or the quality of investigations by the police force are discussed.
    Keywords: criminal procedure; plea bargainin; screening; courts; limited rationality
    JEL: D03 D83 K14 K41
    Date: 2018–02–27
  10. By: Reda Aboutajdine (Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique, CREST - Centre de Recherche en Économie et Statistique - INSEE - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique); Pierre Picard (Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique, CREST - Centre de Recherche en Économie et Statistique - INSEE - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: Audit mechanisms frequently take place in the context of repeated relationships between auditor and auditee. This paper focuses attention on the insurance fraud problem in a setting where insurers repeatedly verify claims satisfied by service providers (e.g., affiliated car repairers or members of managed care networks). We highlight a learning bias that leads insurers to over-audit service providers at the beginning of their relationship. The paper builds a bridge between the literature on optimal audit in insurance and the exploitation/exploration trade-off in multi-armed bandit problems.
    Keywords: learning,optimal auditing,ex-post moral hazard,insurance fraud
    Date: 2018–02–20
  11. By: Peyman Khezr (School of Economics, The University of Queensland); Ian A. MacKenzie (School of Economics, The University of Queensland)
    Abstract: This article proposes a simple and efficient auction design to allocate environmental rights, such as tradable pollution permits. We show that if the auctioneer limits the number of bids that each buyer submits—coupled with a simple ex-post supply adjustment rule—then truthful bidding is obtained. Consequently, the uniform-price auction becomes efficient and revenue superior to conventional uniform-price auctions that are currently observed in pollution markets.
    Keywords: auctions; multi-unit; uniform-price; efficiency, pollution.
    JEL: D44 D82 L10 Q50
    Date: 2018–02–27
  12. By: Shuichi Tsugawa; Takuya Obara
    Abstract: We examine optimal taxation and public good provision by a government which takes reduction of envy into consideration as one of the constraints. We adopt the notion of extended envy freeness proposed by Diamantaras and Thomson (1990), called equitability. We derive the modified Samuelson rule at an optimum income tax, and show that, using a constant elasticity of substitution utility function, the direction of distorting the original Samuelson rule to relax envy free constraints is crucially determined by the elasticity of substitution. Furthermore, we numerically show that the level of public good increases (or decreases) in the degree of envy-freeness when the provision level is upwardly (or downwardly) distorted.
    Date: 2017–12
  13. By: João Correia-da-Silva (CEF.UP and Faculdade de Economia, Universidade do Porto.); Joana Pinho (CEF.UP and Faculdade de Economia, Universidade do Porto.)
    Abstract: We study the sustainability of collusion in mixed oligopolies where private and public firms only differ in their objective: private firms maximize profits, while public firms maximize total surplus. If marginal costs are increasing, public firms do not supply the entire market, leaving room for private firms to produce and possibly cooperate by restricting output. The presence of public firms makes collusion among private firms harder to sustain, and maybe even unprofitable. As the number of private firms increases, collusion may become easier or harder to sustain. Privatization makes collusion easier to sustain, and is socially detrimental whenever firms are able to collude after privatization (which is always the case if they are sufficiently patient). Coordinated effects thus reverse the traditional result according to which privatization is socially desirable if there are many firms in the industry.
    Keywords: Collusion; Mixed oligopoly; Privatization; Coordinated effects
    JEL: D43 H44 L13 L41
    Date: 2017–07
  14. By: Mrad Mohamed (LAGA - Laboratoire Analyse, Géométrie et Applications - UP8 - Université Paris 8, Vincennes-Saint-Denis - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - Institut Galilée - CNRS - Centre National de la Recherche Scientifique); N. El Karoui (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The purpose of this paper is to develop an explicit construction of consistent utilities, using the stochastic flows approach developed in [KM13] and [KM16]. Starting from a family of utility functions indexed by some parameter α (for example the risk aversion of different agents), the idea is to randomize α and construct a non standard stochastic utilities processes. Two approach are developed, the first one consists to built directly from the class {U α , α ∈ R} a global one U as a sup-convolution. The second approach which is very different, consists to define from a class (X α , Y α) α∈R of monotonic processes a global pair (X * , Y *) as a mixture. The non standard stochastic utility is then obtained by composing stochastic flows and interpreted as the aggregate utility of all considered agents .
    Date: 2018–03–11

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